Improving the relationship between directors and shareholders Part A: The Context of Shareholding in Europe Dr. Roger Barker Director of Corporate Governance, Institute of Directors (UK) Senior Advisor to the Board of ecoDa roger.barker@iod.com

The structure of company ownership in Europe The Berle and Means vision of dispersed shareholdings offers a good description of listed corporations in the United States and the UK It was assumed that it was a common feature of economic development in all countries…but new evidence emerged in the 1990s Initial work on ownership structure of listed European companies undertaken by Franks and Mayer (1995)…it turns out that shareholdings in continental Europe are often not widely dispersed! These results confirmed by more detailed studies: e.g. La Porta et al (1997; 1999); Barca and Becht (2001); Faccio and Lang (2002) Ownership structure has significant implications for the relationship between shareholders and directors – foreign ownership is also expanding rapidly in most European markets Main findings of Franks and Mayer (1995): 1) Fewer companies in continental Europe are listed on stockmarkets. 2) When companies are listed, there remains a high level of ownership concentration, e.g. amongst the largest (170) companies in France and Germany, there is a single shareholder with an ownership stake of more than 25% in more than 80% of cases. In contrast, in the UK only 16% of the largest listed companies have such a shareholder. 2

Implications of concentrated ownership for board-shareholder relations The presence of controlling shareholders may reduce the willingness of institutional investors, foreign investors and other minority shareholders to invest or engage with companies Minority shareholders may feel vulnerable when investing alongside a controlling shareholder – even with investor protections, there is a significant asymmetry of power The board of directors may have little effective power May be less emphasis on corporate transparency However: Controlling shareholders may be more willing to adopt a longer-term outlook than institutional investors – they can insulate the management from stock price fluctuations and economic cycles Management is directly monitored by the owner of the company. Less scope for CEOs to pursue private agendas, e.g. in terms of executive remuneration, takeovers, empire-building, etc. In contrast, institutional investors may be less engaged. Main findings of Franks and Mayer (1995): 1) Fewer companies in continental Europe are listed on stockmarkets. 2) When companies are listed, there remains a high level of ownership concentration, e.g. amongst the largest (170) companies in France and Germany, there is a single shareholder with an ownership stake of more than 25% in more than 80% of cases. In contrast, in the UK only 16% of the largest listed companies have such a shareholder. 3

Data on European Share Ownership Main findings of Franks and Mayer (1995): 1) Fewer companies in continental Europe are listed on stockmarkets. 2) When companies are listed, there remains a high level of ownership concentration, e.g. amongst the largest (170) companies in France and Germany, there is a single shareholder with an ownership stake of more than 25% in more than 80% of cases. In contrast, in the UK only 16% of the largest listed companies have such a shareholder. 4

Typical widely-held UK companies and their largest shareholders Royal Dutch Shell (Blackrock: 6.6%; Legal & General: 4.2%). Market Cap - $228 bn. GlaxoSmithKline (Blackrock: 5.6%; Legal & General: 3.7%). Market cap - $98.6 bn. Vodafone (Blackrock: 6.0%; Legal & General: 3.6%). Market cap - $145.9 bn. BP (Blackrock: 5.9%; Legal & General: 4.2%). Market cap - $ 136.8 bn. HSBC (Blackrock: 6.6%; Legal & General: 4.0%). Market cap - $181.9 bn. All other shareholders own less than 3% 5

Typical European companies with significant shareholders Roche Holdings (just over 50% owned by descendents of Hoffmann and Oeri families. Novartis owns a further one third.) Market cap - $226 bn. VW (Piëch and Porsche families control more than 53%, State of Lower Saxony 20%, Qatar Holding 17%). Market cap - €78.3 bn BMW (Quandt family own around 47%). Market cap - €53 bn. L’Oréal (Bettencourt family and Nestlé each control around a quarter of the company and vote as a block). Market cap - €77.3 bn Inditex (controlled by Amancio Ortega). Market cap – €70.0 bn Investor AB has major stakes in ABB (7%), Electrolux (29.9%), Ericsson (19.3%), Saab (39.5%) and SEB (20.9%), and is controlled by the Wallenberg family ENI (Italian state has 30.3% golden share). Market cap - €65 bn ArcelorMittal (Mittal family owns 40%). Market cap - $23.2 bn. Sanofi (L’Oréal: 15.6%; Total: 8.9%). Market cap - €100.6 bn Hennes & Mauritz (Controlled by Persson family). Market cap - $59.7 bn Gazprom (50.002% owned by Russian state). Market cap - $108.1 bn Source of market cap data: FT website, as of September 2013 6

Company ownership in Europe Main findings of Franks and Mayer (1995): 1) Fewer companies in continental Europe are listed on stockmarkets. 2) When companies are listed, there remains a high level of ownership concentration, e.g. amongst the largest (170) companies in France and Germany, there is a single shareholder with an ownership stake of more than 25% in more than 80% of cases. In contrast, in the UK only 16% of the largest listed companies have such a shareholder. 7

The separation of ownership from control is dramatic in Telecom Italia, one of the world’s largest telecom companies with a market capitalization of about $40 billion. The pyramidal group includes three listed companies and two nonlisted companies, shown in the Figure. Marco Tronchetti Provera controls 18 percent of the votes in Telecom Italia (and is by far its largest shareholder), although he holds only 0.7 percent of the cash flow rights. Notice that the control over one of the companies in the pyramid (Pirelli) is strengthened via an agreement with other large shareholders on how to vote shares, known as a voting syndicate. Because of this agreement, Tronchetti Provera controls 46.1 percent of the votes in Pirelli: 25 percent directly owned by his holding company Camfin and 21.1 percent provided by other friendly blockholders (Enriques and Volpin 2007: 119). . Telecom Italia Source: Enriques and Volpin (2007: 121)

Collective investment: This group covers institutional investments in the strictest sense (pension funds, insurance companies, mutual funds and collective financial investment companies). The United Kingdom, where this group is made up of insurance companies, pension funds and other collective investment institutions, holds 41% of the market capitalisation, followed by France with 28.8%, Austria (28.5%), Poland (26.1%) and Sweden (24.8%). But the rest of the markets with available dataare below 15%. A significant aspect in the participation of collective investment institutions between 1999 and 2007 is that the share of this group declines significantly. The simple average decreased from 15.8% in 1999 to 12.9% in 2007. This means that the proportion of domestic shares in the portfolios of collective investment institutions has been decreasing while the amount of money in collective investment institutions has increased. This suggests that the international diversification of the portfolios of these institutions embraces non-European markets (America, Asia, etc.) but also reflects a decrease in the holding of shares in the last few years. Percentage of listed companies owned by institutional investors, (i.e. domestic pension funds, insurance companies, mutual funds and other collective financial investment companies) Source: Federation of European Securities Exchanges (2008:16)

Private non-financial companies/organisations in Europe own 17% of the market value of listed shares. They are particularly important in Bulgaria and Germany where they account for 40% of the value of listed companies. The enormous dispersion is because of the particular case of the United Kingdom, where a mere 1.7% of listed shares are in the hands of non-financial companies, almost forty points less than Germany. Both this group and the Private Financial Companies reveal the big differences between the share ownership structure of the United Kingdom and Germany, two of the biggest European markets. Between 1999 and 2007 there was an increase in the participation of private non-financial companies in the ownership of listed shares. The increase of the participation of this group is especially significant in markets with figures above 20%: Spain (+10.1 points to 25.4%), Slovenia (+16.7 points to 29%) and Germany (+4 points to 39%). Why? First as a consequence of the 3-year crisis in stock markets during the period 2000-2002: private non-financial companies acted as a support for share prices and increased their ownership of listed companies as prices became more attractive. Secondly, the acquisition of market share through the purchase of other companies, and the diversification of activities by companies of mature or cyclical sector. Percentage of listed companies owned through cross-shareholdings of other non-financial companies Source: Federation of European Securities Exchanges (2008:20)

Percentage of listed companies owned by banks and savings banks The participation of banks and savings banks decreased in general terms between 1999 and 2007. The weighted average is 5% in 2007, loosing two percentage points since 2005. In the group of countries with higher participation, in Spain the percentage is remarkably reduced between 1999 and 2007, in Germany and France it is increased. A significant increase is found in the UK, where participation below 1% goes up to 3.4%. Percentage of listed companies owned by banks and savings banks Source: Federation of European Securities Exchanges (2008:18)

Percentage of listed companies owned by the state The participation of the public sector in the ownership of listed shares in European markets is particularly high in Norway (30.5%), Lithuania (26.5%) and Slovenia (23%) mostly as a result of the partial privatisation and subsequent listing of large companies in terms of capitalisation. In most countries, 16 out of 22, the participation of the public sector represents less than 10% and in seven markets it is almost insignificant, less than 1%. The market capitalisation weighted average is 5% in Europe, the lowest of the large sectors analysed. Between 1999 and 2007, except for Norway and Lithuania, there was a decline. This shows that even during the crisis and recovery years for stock markets the public sector continued to reduce its participation in share ownership. The simple average in 1999 was 10.6% and in 2007 was 7.6%. Percentage of listed companies owned by the state Source: Federation of European Securities Exchanges (2008:23)

Percentage of listed companies owned by foreign shareholders In general terms, between 1999 and 2007 the participation of foreign investors in European exchanges has slowly increased. The simple average (n.b. not the weighted average, as in diagram) for 1999 was 35.9% and for 2007 is 41.6%. In the period 1999-2007 important increases have not only taken place in emerging countries like Slovenia (+11 points) but also in countries like Switzerland (+14 points), Belgium (+8 points), Germany (+7 points), Norway (+7points) or UK (+7 points). Although the degree of internationalisation and globalisation of the European Exchanges in terms of Share Ownership was already important before the introduction of the Euro and has not changed dramatically, the trend towards higher ownership by foreign investors is clearly growing. Countries that do not follow the trend are Lithuania (-2.4 points), Finland (-3.6 points) or Italy (-2.4 points). Italy shows very low levels of foreign ownership, in comparison to European standards. Percentage of listed companies owned by foreign shareholders Source: Federation of European Securities Exchanges (2008:13)

Sovereign Wealth Funds – increasing stakes in European companies Rio Tinto (12% stake from the Aluminium Corporation of China) Lagardère (Qatar Holding took 10.1% stake in 2011; Arnaud Lagardère holds 14% of voting shares) Barclays (Qatar Holding took 6.8% stake in 2008, and holds warrants for a further 3.2%; Nexus Capital Investing (Abu Dhabi) holds 6.3%) UBS (Government of Singapore: 6.45%) Crédit Suisse (Olayan Group (Saudi Arabia) holds 6.6% and State of Qatar holds 6.2%) Volkswagen (State of Qatar: 17%)